TOKYO, Oct 9 (Reuters) - Japanese who invested abroad seeking higher yields, spurredby ''Big Bang'' financial deregulation, have had their portfolios hit hard by the dramaticdecline of the dollar.

The dollar's 18 percent collapse this week has not only dealt a body blow to investmentvalues but has also forced many Japanese investors to unwind their mounting positions orincrease hedge sales, market sources said.

Dealers said special options-related selling operations, which had originated from foreignexchange deposits and bond purchases by retail investors, may have helped spur thedollar's sharp fall.

''I'm sure special option-linked sales stemming from private investors were one of thefactors that have deepened the dollar's wounds,'' said Noriyuki Mizukami, head ofTreasury sales at National Westminster Bank.

Mizukami said factors like hedge funds' unwinding of yen carry positions and hedge salesby Japanese investors were also factors in the dollar's decline.

Yield-hungry Japanese retail investors have flocked into foreign instruments particularlysince the April 1 launch of the Big Bang.

Many investors have moved into foreign deposits and dual-currency bonds with optionsterms, which enable investors to receive high interest rate at maturity, but only if the levelof the dollar stays above levels agreed at the time of opening an account or a launch.

Investors can face heavy losses if the exchange rate breaks below that level.

Underwriting sources said a total of about 440 billion yen ($3.72 billion) worth of suchbonds were launched between May and October, with almost all having taken heavy lossesafter breaking through options levels set between 117 and 123 yen.

The yen was at 117.40 to the dollar late on Friday, recovering from a low of 111.45 setoverseas.

Many of such options-linked bonds or so-called ''knock-in'' options were set up when thedollar was moving in a range of 130-140 yen.

Domestic and foreign banks do not disclose details of customers' foreign deposits withoptions attached, but many dealers estimated the amount was ''extremely large.''

A plunge in the dollar has forced Japanese investors to hedge their heavy positions in thedollar and European currencies as many of them have been unhedged, dealers said.

Institutional investors have been building up their foreign currency positions in recentmonths in the belief that the dollar's fundamentals were invincible. According to JapaneseFinance Ministry data released on Friday, net purchases of foreign bonds by Japaneseinvestors, based on contracts, totalled 1.2805 trillion yen in September after net purchasesof 911.3 billion yen a month earlier. Standing out were net purchases by life insurers offoreign bonds amounting to 622.4 billion yen and foreign stocks worth 203.8 billion yen.